Earnings Preview: Rising US Light Truck Sales To Boost Toyota Profits

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Toyota Motor

Toyota Motors (NYSE:TM) is set to report financial results for the first quarter of fiscal 2016 on Tuesday, August 4th. [1] The Japanese auto maker is facing a challenging macro environment with consumer habits changing in the profitable markets of North America, tough economic conditions in Europe and Japan, and an economic slowdown in emerging markets. These factors resulted in divergent sales performance across different geographies in fiscal 2015. Sales in North America grew by 7.3%, on the back of increasing sales of SUVs, pickups and crossovers, while a declining economies in Japan and the Rest of Asia meant that sales were down 9% and 7.5% respectively. [2] The company saw a modest sales increase in Europe. However, the strong performance in North America meant that the company’s revenue increased by 5.4% and operating income grew by close to 20% as the strong U.S. dollar translated into a higher number of yen. [3]

See our complete analysis for Toyota Motors here

Strong Truck Sales Offset Weak Car Sales in U.S.

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Traditionally, Toyota has been known for making well engineered, high performing, fuel-efficient sedans like Camry and Corolla, while light-trucks have been the domain of U.S. based auto companies like GM, Ford and Chrysler. However, Toyota is steadily gaining ground in the light trucks market. An industry-wide increase in sales of pickups, SUVs, minivans and crossovers meant that Toyota’s truck sales rose by 18% in the month of June, even as car sales fell by 6.2% (both year-over-year comparisons). [4] Toyota’s overall sales rose by only 3.7%, as its lineup is still heavily tilted on the side of passenger cars. One of the company’s most successful vehicles, the Camry, experienced an 8% decline in sales in May, further confirming the changing appetite of consumers in the world’s second biggest car market.

Toyota still remains the leading retail brand in North America and its position can be further boosted by the positive trends seen in the sales of the vehicles of its luxury brand Lexus. Toyota’s strategy with Lexus has been somewhat different to that pursued by the rest of the companies in the luxury market. Given the high profitability of luxury vehicles, a number of car companies have introduced cheaper, entry-level luxury vehicles in order to attract a relatively less affluent group of customers. Toyota hasn’t followed suit and instead concentrated on quality instead of pricing. This meant that sales of Lexus brand grew by 11% in the month of June, following a 14.5% increase in May. [5] Lexus introduced the Lexus NX earlier this year, giving it a presence for the first time in the compact SUV/crossover car segment. The NX, along with the GX, drove sales for the brand in the month of June. Lexus light truck sales were up by 25% overall in the month of June, even as the brand’s car lineup only posted a growth in sales of 0.2%. [6] Some of the decline was caused by a 14% decline in sales of the Lexus RX crossover, a model that is expected to be replaced soon, so we can expect Lexus light truck sales to grow even more once that happens.

Brief Surge in China

One reason for Volkswagen overtaking Toyota as the global leader in unit sales is that Toyota has missed out on the trend of rising SUV sales in China, the world’s biggest car market. However, Toyota has been doing well in China this year with sales increasing by 10%  on a year-over-year basis on the back of increased demand for the new Corolla and Levin compact vehicles. [7]  Moreover, while the company has been wary of boosting its production capacity in China, following the anti-Japan protests in 2012, it announced plans to spend $440 million on the expansion of a new plant in Guangzhou earlier this year. [8]

However, the Chinese economy is headed for its slowest expansion in three years and recently experienced a stock market crash. Additionally, there has been significant reverse capital flight from the Chinese capital markets. These factors, along with the declining profitability of car dealerships in China, could contribute to a slowdown in the growth in Chinese car sales. As a result, while China sales growth should have boosted profits in the first quarter, this trend could loose energy in coming quarters.

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Notes:
  1. Toyota IR Calendar []
  2. Toyota FY15 Financial Summary []
  3. Ref: 2 []
  4. Strong truck volume helps Toyota offset weak car demand, Automotive News, July 2015 []
  5. Lexus May 2015 Sales Report, Lexus Enthusiast, June 2015 []
  6. Ref: 3 []
  7. Japanese cement comeback in China as Toyota posts record sales, Automotive News, July 2015 []
  8. Toyota plans for capacity increase in China, Seeking Alpha, April 2015 []